Warren Buffett, the famed investor who heads Berkshire Hathaway Inc., and Maurice "Hank" Greenberg of AIG have done business off and on for years. Outside Buffett's Omaha, Neb., office hangs a letter signed by the two insurance titans. It's a memento of a plan the two briefly offered in 1998 to bail out the hedge fund Long Term Capital Management, before others bailed it out instead.
Now, a chain reaction set off by Buffett has dashed Greenberg's nearly four-decade career at the insurance giant American International Group Inc. - and will land both executives before prosecutors next week in a burgeoning industry scandal.
In a bid to win leniency for Berkshire from prosecutors in an unrelated case, several months ago Buffett directed his outside lawyers to turn over documents describing a suspect transaction between a Berkshire unit and AIG, people familiar with the matter say. The documents led to regulatory scrutiny of Greenberg, the people say, and last month cost him his job. Regulators are examining whether AIG manipulated its books to mislead investors; last week AIG confessed to improper accounting that it said could slash its net worth by $1.77 billion.
The steps Buffett took to tip off authorities, previously undisclosed, came as investigators have been growing less forgiving than ever of sins in the financial world - and more likely to look kindly on cooperative executives whose own actions may be subject to scrutiny.
Just now, Greenberg clearly faces more heat than Buffett. Greenberg is scheduled to give a deposition to the Justice Department, Securities and Exchange Commission, New York attorney general's office and New York insurance regulators. Greenberg declined through a lawyer to comment.
Buffett won't be under oath Monday for his interview with investigators, who consider him at this point a witness in the probe, people close to the situation say. They say Buffett is expected to tell regulators he was told briefly about the suspect AIG transaction without receiving a rundown on its details. He is also expected to say it was possible to achieve what AIG sought in a legitimate way and that's what he assumed would happen.
Still unanswered, however, are questions about what Buffett may have known about an estimated 14 other transactions - involving Berkshire's General Re subsidiary - that Berkshire lawyers told regulators about while disclosing the deal with AIG. Also unknown is whether the probes might eventually expand to examine activities of other Berkshire units involved in reinsurance, which is insurance that insurers buy to lessen their own risks.
In an SEC filing this week, Berkshire reiterated its cooperation with federal prosecutors in the investigations involving General Re and said that another of its reinsurance units, National Indemnity, is also cooperating. Berkshire said it also is cooperating with Australian regulators, who have considered launching an investigation into General Re.
The turn of events adds an odd twist to the business relationship between Buffett and Greenberg, two of the highest-profile chief executives in an industry not known for celebrity CEOs.
Beginning in the late 1960s, Greenberg turned AIG into one of the world's most profitable financial companies, taking it far beyond its origins selling insurance in Asia in 1919.
The spark for what led to Greenberg's fall came Dec. 1, in a windowless conference room at the offices of the U.S. Attorney for the Eastern District of Virginia in Alexandria. Prosecutors led by David Maguire were grilling lawyers for a Berkshire unit, Stamford-based General Re, about its dealings with a failed Virginia insurer, people familiar with the matter say. The prosecutors were looking at whether General Re had helped the now-defunct Reciprocal of America disguise loans as reinsurance to hide losses from regulators, an inquiry that is still pending.
The General Re lawyers knew the matter was heating up after two executives of the failed insurer signed plea agreements and began cooperating. But the General Re lawyers were not prepared for what prosecutors then told them.
After delving into the transactions for a year, the prosecutors said, they believed that behavior among some General Re employees was potentially criminal, the people familiar with the matter say. And the prosecutors wanted to know about any similar transactions General Re had done with other companies, an issue they knew was of keen interest to the SEC and the office of New York Attorney General Eliot Spitzer.
After the meeting, Stanley Twardy, outside counsel for General Re, returned to its Stamford offices and met with its chief executive, Joseph Brandon, the people say. The two agreed Buffett should be notified immediately, and Brandon called the Berkshire CEO and alerted him to the problem, these people say. They add that Buffett quickly called his lawyer, Ronald Olson.
Olson assigned a team from his firm, Munger Tolles & Olson, to sift through General Re files looking for documents or e-mails with words and phrases that suggested the sort of nontraditional insurance transactions regulators were interested in. Around the same time, the SEC issued a request for information to General Re about such transactions, which was followed by a subpoena
Within weeks, say people familiar with the matter, the lawyers found traces of a deal they thought troublesome. Urged by Buffett to act aggressively in such a situation, they went directly to authorities. It was a convoluted deal involving a Dublin unit of General Re and a Bermuda unit of AIG - apparently initiated by Greenberg himself.
The Berkshire lawyers turned up a record of a phone call in October 2000 from Greenberg to Ronald Ferguson, then chief of General Re, the people familiar with the matter say. At the time, some AIG investors were concerned that the insurance giant did not have enough reserves set aside to pay future claims.
In the call, Greenberg told Ferguson he wanted to do a deal with General Re to boost AIG's reserves for the coming quarter, and said General Re would receive a fee, according to people familiar with the situation. Ferguson and his lawyer didn't return calls for comment.
The transaction would involve General Re transferring a block of business to AIG: both some premiums and the responsibility for paying some claims. To do this transaction, AIG and General Re turned to offshore subsidiaries.
General Re's Cologne Re unit in Dublin found claims and premiums and passed them to an AIG unit in Bermuda, National Union, the people familiar with the case say. The premiums the AIG unit received totaled $500 million, as did one chunk of the potential losses. National Union booked the premiums as revenue and added $500 million to its reserves for potential losses, ultimately boosting AIG's reserves, the people say.
If the potential losses equaled the premium, AIG would face no risk, wouldn't really be insuring anything, and should not either have treated the $500 million as premium revenue or have increased its reserves. However, the General Re unit also passed an additional $100 million of potential losses to the AIG unit - suggesting that risk truly was transferred. So one thing regulators are zeroing in on is whether, in fact, risk did pass to AIG.
To compensate General Re for the deal, AIG paid it $5 million, say people familiar with the matter. They say General Re first paid AIG $10 million in fees, and then that sum was returned to General Re along with the $5 million in fees - in a transaction routed through an AIG-affiliated insurer.
When Munger Tolles lawyers found this transaction, it set off alarms, because so many elements of the deal seemed unusual, the people close to the situation say. In mid-January, the lawyers discovered an e-mail from a General Re employee to an employee of its Cologne Re unit urging that a file relating to the transaction be kept "locked in a drawer," according to knowledgeable people.
They say the Munger Tolles lawyers called the SEC and Spitzer's office, alerting them to the transaction, and set up a meeting in the SEC's New York offices a few weeks later, on Feb. 8. The lawyers hauled in a fat binder of memos and details of the transaction.
Fallout was swift. Faced with indications that Greenberg and Ferguson may have put together a deal whose main purpose was simply to boost AIG's reserves - in what looked like insurance but wasn't - the SEC and Spitzer's office sent a subpoena to AIG. They sought information about the transaction and any others like it, and followed up by seeking information from several AIG executives, including Greenberg.
The binder the Berkshire lawyers turned over didn't have any documents tying Buffett to the details of the deal with AIG, the people familiar with the matter say.
Now, a chain reaction set off by Buffett has dashed Greenberg's nearly four-decade career at the insurance giant American International Group Inc. - and will land both executives before prosecutors next week in a burgeoning industry scandal.
In a bid to win leniency for Berkshire from prosecutors in an unrelated case, several months ago Buffett directed his outside lawyers to turn over documents describing a suspect transaction between a Berkshire unit and AIG, people familiar with the matter say. The documents led to regulatory scrutiny of Greenberg, the people say, and last month cost him his job. Regulators are examining whether AIG manipulated its books to mislead investors; last week AIG confessed to improper accounting that it said could slash its net worth by $1.77 billion.
The steps Buffett took to tip off authorities, previously undisclosed, came as investigators have been growing less forgiving than ever of sins in the financial world - and more likely to look kindly on cooperative executives whose own actions may be subject to scrutiny.
Just now, Greenberg clearly faces more heat than Buffett. Greenberg is scheduled to give a deposition to the Justice Department, Securities and Exchange Commission, New York attorney general's office and New York insurance regulators. Greenberg declined through a lawyer to comment.
Buffett won't be under oath Monday for his interview with investigators, who consider him at this point a witness in the probe, people close to the situation say. They say Buffett is expected to tell regulators he was told briefly about the suspect AIG transaction without receiving a rundown on its details. He is also expected to say it was possible to achieve what AIG sought in a legitimate way and that's what he assumed would happen.
Still unanswered, however, are questions about what Buffett may have known about an estimated 14 other transactions - involving Berkshire's General Re subsidiary - that Berkshire lawyers told regulators about while disclosing the deal with AIG. Also unknown is whether the probes might eventually expand to examine activities of other Berkshire units involved in reinsurance, which is insurance that insurers buy to lessen their own risks.
In an SEC filing this week, Berkshire reiterated its cooperation with federal prosecutors in the investigations involving General Re and said that another of its reinsurance units, National Indemnity, is also cooperating. Berkshire said it also is cooperating with Australian regulators, who have considered launching an investigation into General Re.
The turn of events adds an odd twist to the business relationship between Buffett and Greenberg, two of the highest-profile chief executives in an industry not known for celebrity CEOs.
Beginning in the late 1960s, Greenberg turned AIG into one of the world's most profitable financial companies, taking it far beyond its origins selling insurance in Asia in 1919.
The spark for what led to Greenberg's fall came Dec. 1, in a windowless conference room at the offices of the U.S. Attorney for the Eastern District of Virginia in Alexandria. Prosecutors led by David Maguire were grilling lawyers for a Berkshire unit, Stamford-based General Re, about its dealings with a failed Virginia insurer, people familiar with the matter say. The prosecutors were looking at whether General Re had helped the now-defunct Reciprocal of America disguise loans as reinsurance to hide losses from regulators, an inquiry that is still pending.
The General Re lawyers knew the matter was heating up after two executives of the failed insurer signed plea agreements and began cooperating. But the General Re lawyers were not prepared for what prosecutors then told them.
After delving into the transactions for a year, the prosecutors said, they believed that behavior among some General Re employees was potentially criminal, the people familiar with the matter say. And the prosecutors wanted to know about any similar transactions General Re had done with other companies, an issue they knew was of keen interest to the SEC and the office of New York Attorney General Eliot Spitzer.
After the meeting, Stanley Twardy, outside counsel for General Re, returned to its Stamford offices and met with its chief executive, Joseph Brandon, the people say. The two agreed Buffett should be notified immediately, and Brandon called the Berkshire CEO and alerted him to the problem, these people say. They add that Buffett quickly called his lawyer, Ronald Olson.
Olson assigned a team from his firm, Munger Tolles & Olson, to sift through General Re files looking for documents or e-mails with words and phrases that suggested the sort of nontraditional insurance transactions regulators were interested in. Around the same time, the SEC issued a request for information to General Re about such transactions, which was followed by a subpoena
Within weeks, say people familiar with the matter, the lawyers found traces of a deal they thought troublesome. Urged by Buffett to act aggressively in such a situation, they went directly to authorities. It was a convoluted deal involving a Dublin unit of General Re and a Bermuda unit of AIG - apparently initiated by Greenberg himself.
The Berkshire lawyers turned up a record of a phone call in October 2000 from Greenberg to Ronald Ferguson, then chief of General Re, the people familiar with the matter say. At the time, some AIG investors were concerned that the insurance giant did not have enough reserves set aside to pay future claims.
In the call, Greenberg told Ferguson he wanted to do a deal with General Re to boost AIG's reserves for the coming quarter, and said General Re would receive a fee, according to people familiar with the situation. Ferguson and his lawyer didn't return calls for comment.
The transaction would involve General Re transferring a block of business to AIG: both some premiums and the responsibility for paying some claims. To do this transaction, AIG and General Re turned to offshore subsidiaries.
General Re's Cologne Re unit in Dublin found claims and premiums and passed them to an AIG unit in Bermuda, National Union, the people familiar with the case say. The premiums the AIG unit received totaled $500 million, as did one chunk of the potential losses. National Union booked the premiums as revenue and added $500 million to its reserves for potential losses, ultimately boosting AIG's reserves, the people say.
If the potential losses equaled the premium, AIG would face no risk, wouldn't really be insuring anything, and should not either have treated the $500 million as premium revenue or have increased its reserves. However, the General Re unit also passed an additional $100 million of potential losses to the AIG unit - suggesting that risk truly was transferred. So one thing regulators are zeroing in on is whether, in fact, risk did pass to AIG.
To compensate General Re for the deal, AIG paid it $5 million, say people familiar with the matter. They say General Re first paid AIG $10 million in fees, and then that sum was returned to General Re along with the $5 million in fees - in a transaction routed through an AIG-affiliated insurer.
When Munger Tolles lawyers found this transaction, it set off alarms, because so many elements of the deal seemed unusual, the people close to the situation say. In mid-January, the lawyers discovered an e-mail from a General Re employee to an employee of its Cologne Re unit urging that a file relating to the transaction be kept "locked in a drawer," according to knowledgeable people.
They say the Munger Tolles lawyers called the SEC and Spitzer's office, alerting them to the transaction, and set up a meeting in the SEC's New York offices a few weeks later, on Feb. 8. The lawyers hauled in a fat binder of memos and details of the transaction.
Fallout was swift. Faced with indications that Greenberg and Ferguson may have put together a deal whose main purpose was simply to boost AIG's reserves - in what looked like insurance but wasn't - the SEC and Spitzer's office sent a subpoena to AIG. They sought information about the transaction and any others like it, and followed up by seeking information from several AIG executives, including Greenberg.
The binder the Berkshire lawyers turned over didn't have any documents tying Buffett to the details of the deal with AIG, the people familiar with the matter say.
When Buffet purchased General Re, Buffet ordered General Re executives to delay claims and to commence baseless arbitrations agaist many of General Re client companys and this action caused the demise of many smaller Insurance Companies including Aries Insurance Company.
